Constellation/EdF: 'Broad support' for Governor's proposal to pass; joint venture likely not materially affected - sources

06-Mar-09

An amendment by Gov. Martin O'Malley on two utility bills in Maryland state legislature should pass with "broad support" from state politicians, said industry lawyers and politicians. The amendment is not expected to substantially impact the joint venture between Constellation Energy (NYSE: CEG) and Electricite de France (EPA: EDF), they said.

Two bills in the state's legislature call for the Maryland Public Service Commission (MPSC) to be rearmed with the ability to buy back privately owned land and power plants and seek to clarify the MPSC's deal jurisdiction. The Governor's proposal seeks to amend the bills by allowing "prospective" reregulation - the ability to enforce lowering of ratepayer cost - instead of "retroactive" reregulation, which the bills applaud.

State Sen. James Rosapepe, who co-authored one of the bills with Sen. E.J. Pipkin, said he expects the final draft to be a melded version of the two bills and the Governor's amendment. The legislature should reach a conclusion within its current session, or in about five weeks, Sen. Rosapepe said. He expected the final version to pass in the Senate within the next week before moving on to the House of Representatives.

Shaun Adamec, the Governor's deputy press secretary, said that Gov. O'Malley had been seeking a solution to deregulation for some time and that he had announced a semblance of this plan at a dinner in August. The state government realized that deregulation of utilities in the late 1990s had yet to produce the lowest costs for ratepayers, after hiring a consulting firm to study Maryland's power generation, demand and corresponding rates. The study found that the state would need at least two more plants to generate enough power to meet the rising consumer demand. Unnamed state utilities, Adamec said, were refusing to build additional generators on land they owned because it was not in their economic interest.

Constellation itself was the center of such an investigation in 2008, when it reached a USD 2bn settlement with the state government after it was found to not be fulfilling optimum production to meet consumer needs. One reason that Gov. O'Malley is not pushing for full reregulation, Adamec noted, is that the state would need to use the brunt of the settlement to buy back plants, not to pass back to ratepayers as planned.

Constellation declined to comment further on the topic, and an EdF spokesperson was unable to provide company comment by press time.

The completion of the EdF/Constellation joint venture could hinge on whether the deal is considered as having been struck in the past and therefore not be under reregulation purview, several industry lawyers said. "The Governor made it clear he will not undo 'done' deals, but the big question is what that entails for this transaction which has not been completed," a industry lawyer said.

A second industry lawyer said he would be "astounded" if EdF hasn't factored in political interference as part of its JV with Constellation. "When you are buying power plants, you know you will run into political hurdles."

EdF's JV proposal includes the future development of an additional nuclear plant at Calvert Cliffs, where it already operates a UniStar joint venture. The Governor's proposal, released 2 March, is not expected to interfere with this construction, as it would jeopardize the jobs created by the plant. Constellation CEO Mayo A. Shattuck III said Constellation will be interested to see the policy proposal by the Governor and "welcome a responsible approach to planning for the state's energy needs, particularly where it concerns the opportunity of a third nuclear unit at Calvert Cliffs and the essential development of renewable and low carbon generation in Maryland ."

A third industry lawyer said that the two parties are likely anticipating the passage of the legislation and trying to negotiate financing and pricing certainty for the venture. "It sounds to me like this legislation may be acceptable to both EdF and Constellation," he said.

Sen. Rosapepe said that the politicians had been in touch with EdF and that the French utility had indicated it could operate the plants under further state regulation or without it.

A divergence of strategy may exist between Constellation and EdF, Sen. Rosapepe said, as EdF has made it clear it is taking a long-term investment position in Maryland whereas Constellation has stuck to what the Senator described as a "speculative" approach.

Further, Sen. Rosapepe pointed out that Federal loan guarantees, sought by Constellation for the construction of the Calvert Cliffs plant, would be secured more easily if the Feds knew the plant would be regulated and have a guaranteed market.

A merchant nuke plant has never been built in the US , said Sen. Rosapepe, and that is one reason that Constellation wants the 80% loan guarantee from the Federal government.

But whether the Federal government will actually give it to them is unclear. "If you are underwriting a loan guarantee, would you prefer to loan to a speculative merchant project or to a regulated project with a guaranteed market?" questioned Sen. Rosapepe.

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